What to do if you are struggling to repay your payday loan

Have you ever tried to help someone, only to make matters worse? Perhaps you offered advice to a friend who misunderstood and took action that resulted in their problems worsening.

We’ve all been there. Imagine you’ve offered to help someone who had injured themselves on the street, only to find that another person with more expertise would be of more use. Good intentions don’t always mean good results, and this is certainly true when applying to payday loans.

Borrowers take on payday loans for a number of different reasons. For some people, a payday loan can offer a much-needed solution to a difficult situation. Maybe their boiler has broken and they’re skint until payday; or their car won’t start, but they can’t afford the repairs until the end of the month. Payday loans can allow us to meet these essential costs and most borrowers fully intend to repay the loan on the agreed date of repayment.

But unfortunately, good intentions aren’t always enough. So, for those struggling to pay payday loans - you are not alone, and there are steps you can take to dig yourself out of the financial hole. Here’s our guide to what to do if you can’t pay your payday loan.

How do payday loans work?

When you take out a payday loan, you’ll usually agree to repay the full amount on the designated day. This is usually within days or weeks of receiving the money. Your payday loan provider will then use something called Continuous Payment Authority (CPA), which you will have approved at the point of agreeing the loan terms, to take the money from your bank account on this predetermined date. They can then continue to use the CPA once more to attempt to take the money from your account.

Now, you may assume that repaying your payday loan a little late won’t be a big deal. However, one look at the annual percentage rate (APR) of a payday loan, compared with the APR of most other forms of borrowing, will show you otherwise.

Lenders are required to display their APR, which illustrates the price of a loan over the course of an entire year, shown as a percentage of the loan amount, and should include all interest charges and other fees and costs. The APR that borrowers are offered differs widely, but generally the APR for payday loans is many times higher than the APRs for most other types of borrowing.

Another thing about payday loans is that they are usually offered online and are incredibly quick and easy to access. This is great if you need fast cash but it also means that people don’t give the right level of consideration to the responsibilities and costs involved with taking the loan.

What happens if I can’t repay my payday loan?

Interest is, of course, payable on the loan amount at a rate set for the fixed term of the loan and this will also be taken from your account on the repayment date. If there is no money in the account to cover the loan, payday lenders will usually start to add extra interest charges, as well as late payment penalties.

Late payment penalties will be immediately added to the amount now repayable, as soon as you have missed your repayment date. The interest is usually charged at a set percentage per day and debts can quickly escalate within a few days or weeks of non-payment.

Another repercussion of failing to meet your repayment obligations for payday loans is the impact it can have on your credit score. Anyone struggling to repay payday loans is likely to see their credit score fall, making it more difficult to find good credit deals in the future.

Can the cost of a payday loan continue to rise indefinitely?

No. Thanks to new rules imposed on the industry by the Financial Conduct Authority back in 2017, the most a lender can charge you as a penalty for defaulting on a payday loan is £15. The interest applied each day after you fail to pay is then capped at 0.8 per cent of the loan amount.

There is then also a cap on the total amount you will ever owe, to 100 per cent of the amount you borrowed. Therefore, if you borrowed £200, the most you will ever owe in repayments, penalty fees and interest is £400.

What should I do if I can’t repay my payday loan?

If you find that you can’t pay your payday loan, all is not lost. There are a few measures you can take to try to prevent the debt deluge mounting up.

1. Contact your lender

You may feel worried or embarrassed about contacting your payday lender and admitting that you can’t pay your payday loan, but avoiding them is not an option. Gone are the days when lenders were able to hound and berate borrowers who are struggling to pay. Office of Fair Trading regulations now require lenders to give borrowers ‘reasonable time’ to repay debts and ‘treat borrowers fairly and with forbearance if they experience difficulties.’

The best outcome is that you can work out a new payment schedule for your loan, buying you enough time to get the finances together to repay the loan in full. Just be aware that interest charges are still likely to pile up in the meantime, but you can at least relax in the knowledge that you’ve made a fresh arrangement with the lender that, this time, you can fulfil.

2. Get advice from the professionals

Alongside contacting your lender, another priority when struggling to pay off your payday loan is contacting a debt charity that can offer your independent advice and support. Organisations such as Step Change, the Debt Advice Foundation and Citizens Advice will ensure you know your rights and your options.

Can I cancel my CPA?

Yes, you’re within your rights to cancel the continuous payment authority at any time. Many people find they need to take action on this when they realise their lender is about to take a payment leaving them with no cash for urgent matters, such as a mortgage payment or a family food shop.

If you are desperate, cancel the payment with your bank and contact your lender immediately afterwards to discuss the issue and (hopefully) find a solution that works for both of you.

What are the alternatives to payday loans?

Payday loans can work for some people, particularly those who are able to stick rigidly to the repayment schedule and have no problem ensuring sufficient funds are in their account on the repayment date. However, they are an undeniably expensive way to borrow money, so it’s always sensible to consider alternatives. Here are some of the options that might be worth looking into if you need quick access to emergency cash:

• Arranged overdraft with your current account
• Credit cards
• Short-term loans
• Borrowing through a Community Development Finance Institution
• Credit union loans
• Borrowing from a friend or family member
• Requesting pay advance

Or…avoid getting to the point where you need to borrow in the first place

If you find yourself in a debt spiral due to repeated use of payday loans, you could benefit from creating a budget to help you manage your finances. Luckily, there are some brilliant, easy-to-use budgeting apps available to download, which can help you track your income and outgoings and create budgets for your monthly expenses.

Remember, it’s never a good idea to take on a loan that you know you won’t be able to repay. Doing so is likely to result in a much more serious financial situation that no short-term solution will be able to fix. When taking out a payday loan, you need to be absolutely sure that you will be able to repay the full amount, as well as any interest, on the date you have agreed to repay it.

When it comes to personal finances, good intentions are meaningless unless you can follow through.